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Please share your insights on the current economic conditions

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AgendaNational Economic Overview

• Kevin Kliesen, St. Louis FedSt. Louis Economic Overview

• Charles Gascon, St. Louis FedPanel Discussion

• Stella Sheehan, World Trade Center St. Louis• John Einwalter, Mallinckrodt Pharmaceuticals• Patrick Westhoff, Food and Agricultural Policy Research Institute,

University of Missouri• Cletus Coughlin, St. Louis Fed, moderator

Question and AnswerEvent Ends

The Outlook for the U.S. EconomySt. Louis Regional Economic BriefingSt. Louis, MO

Kevin L. KliesenBusiness Economist and Research OfficerJune 20, 2018

Disclaimer

The views we will express today are our own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

The Big Picture• The business expansion is now 9 years old. The average

expansion lasts about 5 years. The record is 10 years.

• Real GDP growth during this expansion has averaged about 2.25% per year. The historical norm is about 3% per year.

• Inflation has finally reached the FOMC’s 2% target. Long-term inflation expectations are stable. Interest rates are low.

• Monetary and fiscal policies are boosting growth, but the Fed is in the process of gradually “normalizing” monetary policy.

Real GDP: Stunted Growth

7.6

4.0

5.64.9 5.1

4.3 4.4 4.33.6

2.82.2

4.4

0

1

2

3

4

5

6

7

8

9

1949-53 1954-57 1958-60 1961-69 1970-73 1975-80 1980-81 1983-90 1991-2001 2001-07 2009Q2 -Present

Average Real GDP Growth During Post-WWII U.S. Business ExpansionsPercent change, annualized rate

SOURCE: BEA and author's calculations.

So Many Questions!• Is 2.25% economic growth still the norm?

• Or, will tax reform and deregulation boost the economy’s short- and long-term prospects?

• How should we think about increases in the budget deficit arising from tax cuts and increased federal spending?

• How will potential disruptions to the international trading framework affect the U.S. and world economies?

• Will inflation continue to move higher?

• The labor market continues to strengthen and economic activity has been rising at a solid rate.

• Growth of household spending has picked up, while business fixed investment has continued to grow strongly.

• Overall inflation has moved close to 2%; indicators of long-term inflation expectations are little changed.

• The Committee decided to raise the target range for the federal funds rate to 1.75% to 2%.

The Movement of Goods is Accelerating

44

47

50

53

56

59

62

May.2008 Nov.2009 May.2011 Nov.2012 May.2014 Nov.2015 May.2017

University of Louisville/OSU Logistics and Distribution Activity IndexValues above 50 indicates healthy economic activity.

SOURCE: St. Louis Fed (FRED), the University of Louisville, and Oklahoma State Univ.

(June 2018)

The LoDi measures national activity in the rail, barge, air, and trucking industries.

A Broad Measure of Labor Market Activity Indicates Full Employment

-4

-3

-2

-1

0

1

2

3

1986 1990 1994 1998 2002 2006 2010 2014 2018

Recession

1986 to Present

Current (May 2018)

St. Louis Fed Labor Market IndexIndexed Value (>0= Above-Average Labor Market Conditions)

SOURCE: Federal Reserve Bank of St. Louis

Inflation Has Returned to the Target

2.0

0.0

1.0

2.0

3.0

4.0

Jan.2010 Jul.2011 Jan.2013 Jul.2014 Jan.2016 Jul.2017

The Fed's Preferred Inflation MeasurePercent change from a year earlier

FOMC Inflation Target (2%)

NOTE: Inflation calculated from the personal consumption expenditures price index . Last observation is April 2018. Source is the Bureau of Economic Analysis.

2.00

0.0

1.0

2.0

3.0

4.0

Jan.2010 Jul.2011 Jan.2013 Jul.2014 Jan.2016 Jul.2017

Long-Term Inflation Expectations(Inflation expectations based on TIPS)

FOMC Inflation Target (2%)

NOTE: Inflation calculated from the personal consumption expenditures price index . Inflation expectations are 5-year, 5-year forward break-even inflation rates.

Inflation Expectations

(May)

Inflation is Forecast to Remain Near 2%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16 Apr-17 Jan-18 Oct-18

Actual Inflation StL Forecast 2 % target

Headline PCE Inflation: Actual and ForecastYear/Year Percentage Change

Source: BEA; Jackson, Kliesen, Owyang.

The FOMC’s Latest Economic Projections

2.6

4.1

1.7

2.83.6

2.12.4

3.52.1

1.8

4.5

2.0

0.0

2.0

4.0

6.0

Real GDP Unemployment Rate Inflation

2017 (A) 2018

2019 Longer run

June 2018 FOMC Economic ProjectionsPercent

NOTE: FOMC Projections are the median estimates of FOMC participants. The unemploymentrate is the average of the fourth-quarter for the year indicated.

The FOMC: We’re Bullish on the U.S. Economy!

“The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.” [FOMC Statement, June 13, 2018]

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2005 2007 2009 2011 2013 2015 2017 2019

Fed Funds Rate FOMC SEP, June 2018 Long-Run Median FFR

The Actual and Projected Federal Funds Target RatePercent

• Tax cuts, coupled with increases in household wealth (stocks and housing equity), should keep consumer spending and housing construction growing at healthy rates.

• Deregulation and tax law changes will encourage firms to boost capital spending, hiring, and repatriate foreign profits.

• All else equal, these developments will tend to raise productivity, real wages, and economic growth.

• Unless inflation ramps up, the FOMC will be patient in withdrawing monetary stimulus.

Why You Should be Optimistic . . .

And Why You Might Worry.• Productivity growth, the key ingredient to rising living

standards, remains lethargic.

• The federal budget outlook (near and far) is worsening. Increasingly large budget deficits could also cause a spike in inflation expectations, inflation, and thus interest rates.

• International trade disruptions could roil markets, raise business uncertainty, and lead to lower growth.

• The Fed could tighten too much.

Kliesen’s Fearless U.S. Forecast•Projected averages, 2018 to 2020:

−Real GDP growth: 2.5% to 3.0%−Unemployment rate: 3.5% to 4.25%−Headline inflation: 2% (some upside risk)

DATA HEAVEN RESIDES HERE!

Current Economic Conditions

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Overview on Trade in St. Louis


20


St. Louis economic growth is slower than U.S.

21Source: St. Louis Fed/BEA

-5

-3

-1

1

3

5

7Pe

rcen

t

Real Gross Domestic Product Economic Conditions Index for St. Louis, MO-IL (MSA)

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St. Louis economic growth is also slower than neighboring metro areas

2.8

1.61.5

2.22.3 2.3

2.5

0

0.5

1

1.5

2

2.5

3

National Real GDPGrowth

St. Louis Louisville Memphis Chicago Kansas City Nashville

Perc

ent

SOURCE: FREDNOTE: MSA Economic Growth Indexes are averages of monthly observations from December 2017 to March 2018.National Real GDP Growth is Q1 2018 real Gross Domestic Product percent change from a year ago.

Other economic indicators also point to slower growth

23

3.6%

0.9%

5.1%

-9.0%

1.1% 0.7%

3.9%

1.6%

6.6%7.7%

1.3%

2.7%

Unemployment Rate(April '18)

Job GrowthMay '18 Y/Y)

House Price Growth(Q1 '18 Y/Y)

Permits for New PrivateHousing Units

(Average Y/Y from April 2017-18)

Bank (asset <$5b) ROA Growth(Q1 '18)

Average Hourly EarningsGrowth

(2017 Y/Y)

St. Louis MSA National

Real GDP Growth by State: 2017 Q4Percent change from one year ago

Real GDP Growth by State: 2016 Q4Percent change from one year ago

Texas/ Mountain West driving recent boom in growth

SOURCE: BEA/GEOFRED

US: 1.8%US-TX: 2.0%

US: 2.4%US-TX: 2.2%

May Beige Book: Growth continues

25

“Economic activity expanded moderately in late April and early May with few shifts in the pattern of growth. The Dallas District was an exception, where overall economic activity sped up to a solid pace.”

District economic conditions improved slightly

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0

5

10

15

20

25

30

35

40

45

May

-14

Aug-

14

Nov

-14

Feb-

15

May

-15

Aug-

15

Nov

-15

Feb-

16

May

-16

Aug-

16

Nov

-16

Feb-

17

May

-17

Aug-

17

Nov

-17

Feb-

18

May

-18

Net

Per

cent

age

8th District

St. Louis

How do you expect local economic conditions to change during the remainder of this year?

NOTE: The index equals percentage responding "better" minus the percentage responding "worse." The Fourth quarter survey always asks for outlook for next year, all other surveys ask about the outlook for remainder of current year relative to the prior year.

Contacts express concern over trade, but remain optimistic

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“Contacts reported major disruptions in international supply-chain management and import-export banking business due to uncertainty over trade policy…”

“Manufacturers noted no unusual price pressures although some were concerned about future effects on prices of tariffs or other changes in trade policy.”

“…while uncertainty over trade policy had not negatively impacted capital projects already underway, a number indicated that they have tapped the brakes on projects in the planning phases.”


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Setting the Foundation

• Trade Flows– Outflows: Goods produced (or value-added) in St. Louis and shipped

elsewhere.– Inflows: Goods shipped to St. Louis– Gross Flows: Inflows + Outflows– Trade Balance: Outflows – Inflows

• Exports: Outflows shipped directly overseas• Imports: Inflows shipped directly to St. Louis

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Setting the foundation

30

Gross International Trade is equal to 28% of US GDP26% of St. Louis GDPabout $10,000 per person

International Trade Balance equals -3% of US GDP-5% of St. Louis GDP

North American trade comprises30% of US Gross Intl Trade29% of St. Louis Gross Intl Trade

Source: Brookings Goods Trade Database

International trade per-capita is highest in Midwest

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St. Louis’s trade is predominantly within the US

32

$198 Billion

Source: Brookings Goods Trade Database

87%$108 billion

13%$15 billion16%$32 billion

84%$166 billion

Largest trading partners are nearby metro areas

33Source: Brookings Goods Trade Database

Primary traded goods are chemicals/plastics, energy products, transportation equipment


0%

5%

10%

15%

20%

25%

30%


Trade surpluses are in energy products, chemicals/plastics, transportation equipment


-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%


St. Louis has a small trade deficit


-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%Memphis

Chicago Kansas City

Nashville St. Louis

Louisville

Summary of Key Statistics

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Domestic and International TradeGDP

(Mil. $)Gross Flows

(Mil. $)Gross Flows

(as % of GDP)Trade Balance

(% of GDP)St. Louis MSA $121,382 $198,148 163% -4.7%Median MSA $45,947 $76,630 159% -6%St. Louis Rank 21 14 46 46

International TradeGross Flows

(Mil. $)Exports (Mil. $)

Gross Flowsas % of GDP

Trade Balance (% of GDP)

St. Louis MSA $31,599 $12,584 26% -5.3%Median MSA $10,101 $4,110 21% -5%St. Louis Rank 15 16 30 63

Final Thoughts

• St. Louis’s economic performance has lagged the nation during much of the recovery.– Much can be attributed to slow population growth, per-capita growth

looks stronger.

• My outlook for St. Louis is driven by the national outlook. • A cursory review of the trade data provides further evidence

of how intertwined St. Louis’s economy is with the nation and the world.

38

Please share your insights on the current economic conditions

Visit bit.ly/stleconYou can also use this link to sign up to receive our regional reports.

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Please share your insights on the current economic